Scotland lagging behind but data-driven productivity push can level the playing-field

With Scottish businesses facing an unparalleled quadruple whammy of COVID-19, staff shortages, supply chain disruption and rising costs, the third edition of the annual CBI/KPMG Scottish Productivity Index arrives with Scotland’s economy at an important crossroads.

Latest data shows Scotland continues to lag competitors across several key indicators. While there are some encouraging signs of improvement, action is needed from both business and government to help steer the country towards recovery, competitiveness and sustainable growth.

The Index, conducted with research partners KPMG, the Fraser of Allander Institute and the Diffley Partnership, tracks Scotland’s productivity performance across 15 key indicators, in four categories: business practices; skills and training; health and wellbeing; infrastructure and connectivity.

Key findings:

• Overall picture. Scotland lags other parts of the UK or international competitors in 9 of the 13 productivity indicators for which comparable data was available (down from 11 out of 15 in 2020). This includes business investment, exporting and innovation.
• Short term productivity gains. 4 out of the 15 indicators show short-term improvements (down from 6 in 2020). This includes the percentage of people with a Higher Education Certificate or above and the percentage of premises with access to full fibre broadband.
• Long term productivity gains. 8 indicators show progress is being made over the long-term, out of 13 for which relevant data was available (the same number as 2020). This includes early-stage entrepreneurial activity and business R&D spend.

Key recommendations for the Scottish and UK governments include:

• Create a smart taxation environment that rewards business investment, including building on the super deduction and using the business rates system to incentivise investment, especially in decarbonisation.
• Make the Shortage Occupation List more agile and responsive to economic need to help businesses with the immediate challenge of skills and labour shortages which are impacting productivity and introduce an SME training tax credit.
• Speed up the roll out gigabit capable broadband across the whole country to help firms maximise the benefit of new ways of working and develop a gigabit toolkit to spur business and consumer adoption.

Key recommendations for businesses include:

• Commit to increasing investment in training, relative to pre-pandemic levels. The heightened competition for talent means upskilling and retraining current staff can provide an advantageous alternative to entering the recruitment market.
• Accelerate technology adoption plans beyond just remote working and monitor office use to develop a strategic approach to hybrid working that enhances efficiency.
• Establish organisational norms that support staff’s mental and physical wellbeing wherever they work and encourage managers to establish a mental health action plan with their teams.

A full suite of data and recommendations is available in the report, available here: https://www.cbi.org.uk/media/mondc3sh/scottish-productivity-index-2021.pdf  

Tracy Black, CBI Scotland Director, said:

“Even without taking COVID-19, and the latest uncertainty around the Omicron variant, into consideration, Scotland’s struggle to boost productivity has been a stubborn challenge for decades. As we look to rebuild a better, fairer and greener economy, productivity data must guide tangible and immediate action.

“Improving productivity is fundamental to how much we earn, how fast our wages grow, how we support good quality public services and ultimately how we deliver a vibrant, sustainable and prosperous economy for the future. The pandemic has reemphasised the importance of fixing economic fundamentals, building resilience and ensuring the proceeds of growth reach every part of the country.

“While the latest index data shows we are making improvements in some areas, the fact we continue to lag behind domestic and international competitors overall shows the need for rapid remedial action. Scotland does a great job in terms of setting ambitious long term economic goals, but businesses desperately want to see swift progress in moving from high level discussion to impactful delivery. Ambition must translate into action now or we risk the gap widening.”

James Kergon, Senior Partner KPMG Scotland, said:

“Tackling the productivity conundrum must remain a long-term ambition for Scotland, particularly given the stalling impact the past two years have had on growth. The pandemic showed us that our businesses are entrepreneurial and flexible, but Scotland’s firms will be hoping next year brings solid ground allowing them to shift focus from short term survival to long term growth.

“Despite the obstacles facing us, Scotland must make the most of its strengths in order to grow, including our high numbers of university graduates, a thriving early-stage entrepreneurial scene and a growing share of R&D spending by businesses. Of course, we must address areas which have suffered because of the pandemic, including overall business investment, exports, and in-work training.

“With businesses and policy makers working together and recognising that barriers to growth are universal, we can boost productivity and at the same time address the critical issues facing Scotland – including climate risk, wellbeing, skills and social equity.”

Mairi Spowage, Director of the Fraser of Allander Institute, said:

“Almost two years have passed since COVID-19 hit Scotland, fundamentally changing the way we work and operate as an economy.

“The pandemic has exacerbated existing productivity challenges in Scotland, making short-term gains in productivity difficult to achieve. And, while the productivity index shows signs of long-term improvements, the impact that ‘long COVID’ could have on the future health and productivity of the workforce remains uncertain. Longer-term scars of the pandemic could make tackling challenges like the productivity puzzle all the more difficult.

“It is vital that government and business work together to not only support the recovery from the ongoing pandemic but also to build a more sustainable economy capable of better withstanding future crises.”